postings by Alan White

How to think about banks

posted by Alan White

Banking is not an industry; banking is not the real economy. The big banks especially are economic and political behemoths that remain unpopular and poorly understood in the popular imagination. Opinion polls show voters favor breaking them up, and some shareholders do too. While Wall Streeters may bemoan the fact that banks are no longer hot growth stocks, I suspect most voters who chose either candidate would not be saddened to see banks become public utilities. The Republican agenda to roll back Dodd-Frank, if this means unshackling the megabanks from speculating with public and taxpayer funds, will be the first betrayal by the incoming administration of its voter base.

Banks are now basically franchisees of the government's, i.e. the taxpayers', full faith and credit, as recently and eloquently explained by Professors Saule Omarova and Robert Hockett  Banks create and allocate capital because the government recognizes bank loans as money and puts taxpayers' full faith and credit behind bank IOUs. The conventional story that banks convert privately-accumulated savings into loans to borrowers is a myth. Because banks are public-private partnerships to create and allocate capital, the public can and should play a central role in insuring that the financial system serves the needs of the real economy, not just the financial economy.

So here is the first test for our new federal leaders. Are you tools of Wall Street, doing its bidding by undoing financial reform, or will you turn banks into the public utilities they ought to be?  

The Color of Credit: Cities vs. Banks

posted by Alan White

Appendix 4 Foreclosures Miami Reduced

On Election Day, the Supreme Court will hear argument in the cases of  Wells Fargo v. City of Miami and Bank of America v. City of Miami. At issue is the standing of cities to sue banks for mortgage redlining and reverse redlining.

The history of redlining is well known. Banks, in concert with the housing agencies of the New Deal, drew lines around minority neighborhoods where no home mortgage loans would be made (or backed by federal agencies). Starting in the 1990s and until the 2008 crisis, subprime mortgage lenders, some of them affiliates of major banks, targeted the same minority neighborhoods for high-cost, high-risk loans. Inevitably, the same minority neighborhoods have been devastated by the recent wave of foreclosures.

Less well known is that since 2008, the overcorrection and severe tightening of mortgage loan approvals has had a hugely disparate impact on communities of color, especially in cities. Redlining is back. 

 

Continue reading "The Color of Credit: Cities vs. Banks" »

Still Not Deleveraging American Homeowners

posted by Alan White

The Federal Housing Finance Agency has finally announced a program to reduce principal balances of distressed home mortgages held by Fannie Mae and Freddie Mac, eight years into the foreclosure crisis. Too little, too late would be an understatement to describe this initiative. According to the agency’s announcement, they expect about 33,000 homeowners to be eligible to have their mortgage debt reduced to the value of their homes. According to the Zillow negative equity report, more than 6 million homeowners have mortgage debt exceeding their home value, and almost a third of all homeowners are effectively underwater, meaning that their equity is less than 20% of the home value, making it difficult to sell or refinance.

Aggregate value of homes in the US rose from $10.9 trillion in 1998 to $28.3 trillion in 2006, then declined to $19.5 by the beginning of 2012, recovering somewhat in the past three years. This one-third decline in home values was not accompanied by a one-third decline in mortgage debt. Residential mortgage debt peaked at 10.6 trillion in 2006, and then declined to 9.5 trillion by the end of 2012, just a 10% easing. The overhang of home mortgage debt remains a huge impediment to consumer spending, wealth accumulation and the closing of the racial wealth gap in the United States. It is regrettable that the FHFA continues to take such a narrow view of its role as the regulator of our secondary mortgage market utilities and fails to pursue the social values that our taxpayer-backed housing finance system ought to advance.

Nobody Told Us

posted by Alan White

Yesterday Senator Warren rightly excoriated former Fed consumer regulator, now industry lawyer Leonard Chanin after he claimed that, prior to the 2008 crisis, the Federal ReservScreen Shot 2016-04-06 at 9.31.46 AMe Board had only anecdotal evidence that subprime mortgages were a problem. Mr. Chanin served for many years as counsel for the Fed's Consumer and Community Affairs division. In fact, three times a year, from 1996 until 2007, members of the Fed's consumer advisory council called for regulation of subprime mortgages.  The Fed held regular hearings where witnesses told Mr. Chanin and his colleagues that 1) subprime foreclosures were a serious and growing problem and 2) Congress gave the Fed legal authority to do something about it. Here are a couple of instances in which I can recall having personally warned them. 

Student Loan and Mortgage Debt and the Racial Wealth Gap

posted by Alan White

Forgiving student loan debt for low-income Americans could reduce the racial wealth gap among those households by as much as 50%, according to a new report from Demos and the Institute on Assets and Social Policy. Abbye Jo Atkinson has just posted an interesting paper arguing that mortgage debt reduction could likewise significantly reduce the racial wealth gap. Even reducing interest rates on distressed mortgages systematically (rather than randomly under HAMP and similar programs) would disproportionately aid minority borrowers, who disproportionately were assigned to the subprime market.

The 2008 foreclosure crisis devastated household wealth for black and hispanic families in the U.S. While the median net worth for white families declined from $193,000 to $142,000 between the 2007 and 2013 Survey of Consumer Finances, the median net worth for black families eroded from $19,2000 to $11,000.  Much of this story is about homeownership rates and home value declines, but another big piece of the net worth story is about debt, especially mortgage and student loan debt.

The Demos/IACL report notes that while young black adults are significantly less likely to attend college and to have a college degree, and have lower incomes than their white counterparts, they are nevertheless more likely to have significant student loan debt.

The racial wealth gap is fundamental to racial inequality in our nation. It means that the starting line for each generation is unequal. The initial distribution, of housing, education, and capital for each new generation is grossly skewed. The federal government owns most of the nation's student loan debt and mortgage debt (via the effectively nationalized and nominally independent GSEs), and could therefore legislate a variety of tailored debt reduction programs, that might begin to repay the nation's huge debt to the descendants of its former slaves.

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